Federal Reserve Board research reviews inflation targeting’s evolution and highlights challenges for forward guidance, balance sheet policy and financial stability

The Federal Reserve Board published a research paper by Michael T. Kiley and Frederic S. Mishkin examining how inflation targeting evolved from its early 1990s origins into a predominant monetary policy strategy across advanced and emerging market economies, and assessing its performance and current challenges. The paper argues that inflation targeting has been notably successful in anchoring inflation, attributing this to core framework features shared across central banks, including a systematic reaction process aimed at returning inflation to target while allowing flexibility and limiting discretionary biases, and an emphasis on communicating the inflation outlook to support transparency and accountability. It concludes that inflation-targeting central banks have generally managed the major shocks associated with the Global Financial Crisis and COVID, while identifying challenges related to the calibration and communication of forward guidance, quantitative easing and tightening, and financial stability considerations.